Defendant May Not Substitute Diverse Party Where Plaintiff Sued “Wrong” Entity

In Salazar v. Allstate Texas Lloyd’s, Inc., No. 04-41043 (5th Cir. July 10, 2006), plaintiff sued for breach of contract and bad faith the entity he believed was his insurer. That entity was a Texas resident, and plaintiff sued in state court. In fact, however, the issuer of the policy was Allstate Illinois, and if plaintiff had sued that company instead Allstate could have removed based on diversity.

Allstate Texas filed removal papers and then moved to add Allstate Illinois and dismiss Allstate Texas. The district court granted those motions and refused to remand the case.

The Fifth Circuit held that this type of substitution is improper. While Rules 17, 19 and 21 might apply in a typical misjoinder or fraudulent joinder case, here only one party had ever been named as a defendant. In that situation, the district court lacked jurisdiction at the outset and substitution could not be used to create federal jurisdiction.

Federal Government Is A “Person” Amenable To Service Of A Rule 45 Subpoena

The Court of Appeals for the District of Columbia Circuit has rejected the assertion by the federal government that it is not subject to Rule 45 because it is not a “person.”

In Yousuf v. Samantar, No. 05-5197, 2006 WL 1651050 (D.C. Cir. June 16, 2006), plaintiffs served a third-party subpoena on the State Department seeking certain documents relevant to their tort claims against another individual. The government objected that Rule 45(a)(1)(C) authorizes service of a subpoena only upon a “person” and that it was not within the scope of that word as used in the rules.

After an exhaustive analysis of the government’s statutory construction arguments, the court held that litigants indeed may serve third-party subpoenas upon the government because the framers of the rules intended the term “person” to include non-natural persons including the U.S. government.

Administrative Closure Not Final Disposition Allowing Appeal

Appellate courts sometimes get very technical about the finality requirement for appeals.

In CitiFinancial Corp. v. Harrison, No. 04-60979, 2006 WL 1644828 (5th Cir. June 15, 2006), a financial services consumer brought claims in state court concerning a contract that included an arbitration clause. CitiFinancial removed the case.

While it was pending before one judge, CitiFinancial filed its own lawsuit before another judge seeking an order to compel arbitration and to stay the first case. The court granted that motion and the judge in the original case complied, “administratively closing” the case that was now stayed.

The consumer appealed the order staying the first case and compelling arbitration. The Fifth Circuit concluded that under normal circumstances it has jurisdiction over an appeal from an order compelling arbitration because such an order essentially is final. Here, however, part of the dispute was still ongoing in the original court. The Fifth Circuit ruled that the “administrative closure” did not count as ending the case, because such closures merely stay the case while removing the case from the court’s active docket for statistical purposes, without permanent dismissal.

Federal Arbitration Act Does Not Authorize Nationwide Service Of Process.

In Dynegy Midstream Services, LP v. Trammochem, 451 F.3d 89 (2d Cir. June 13, 2006), several parties arbitrated a dispute before a New York panel of arbitrators. One of the parties sought to subpoena Dynegy, a Texas-based third-party, and the panel served a subpoena for documents to be produced in Houston.

After Dynegy ignored the subpoena, the interested party successfully moved to compel compliance with the subpoena in New York federal court, and Dynegy appealed.

The Second Circuit held that the Federal Arbitration Act does not authorize nationwide service of process. While it empowers arbitrators to “summon in writing any person to attend before them” and to bring documents, it also requires that service of such a summons be made in the same manner as a Rule 45 subpoena. In this case, the New York panel could not have served the Houston company under the geographic limitations of Rule 45, and the district court lacked personal jurisdiction.

Appellate Court Affirming Jury Verdict Still Must State Reasoning

The Texas Supreme Court has remanded an appeal for preparation of a more informative opinion.

In Gonzalez v. McAllen Medical Center, Inc., No. 03-0939, 2006 WL 1562847 (Tex. June 9, 2006), a jury rejected the claims of medical negligence plaintiffs. On appeal, the court affirmed the verdict and disagreed with plaintiffs’ argument about the sufficiency of the evidence. However, its rejection of that argument in a single sentence that the evidence was sufficient without stating any reasons why.

In Texas, an appellate court reversing a jury verdict on sufficiency grounds must detail the evidence and clearly state why the jury’s findings were factually insufficient. Even though in affirming a verdict a much lower level of detail is needed, the Supreme Court held that the court still must provide the “basic reasons” for the decision, and not merely recite that the evidence was sufficient.

U.S. Supreme Court Holds No Private RICO Action Available For Tax Underpayment

The U.S. Supreme Court has limited the reach of the Racketeer Influenced and Corrupt Organizations Act in certain private disputes.

In Anza v. Ideal Steel Supply Corp., 126 S. Ct. 1991 (June 5, 2006), a steel supplier brought RICO claims against a competitor that it alleged had unfairly obtained market share by not charging its customers a state tax that plaintiff did charge, thereby undercutting plaintiff’s prices.

Reversing the Second Circuit, the Supreme Court held that a RICO plaintiff must allege some direct relation between the injury alleged and the injurious conduct at issue, and that here the direct victim of the tax fraud was the State of New York. The court rejected the claim here as too attenuated to satisfy the fundamental proximate cause requirement.

U.S. Supreme Court Rejects Presumption Favoring Patent Infringement Injunction

The Federal Circuit, which is often the court of last resort in patent disputes because the U.S. Supreme Court accepts so few cases for review, has developed a line of authority under which plaintiffs who establish patent validity and infringement enjoyed a presumption in favor of injunctive relief “absent exceptional circumstances.”

However, in eBay Inc. v. MercExchange, L.L.C., No. 05-130 (May 15, 2006), the U.S. Supreme Court held that the four-factor test traditionally applied by courts of equity in deciding whether or not to grant injunctive relief applied equally to disputes arising under the Patent Act.

Regardless of the fact that a case involves alleged patent infringement, a district court should not issue an injunction unless it finds (1) that plaintiff has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.

State Taxpayers Lack Standing To Challenge State Tax Or Spending Decisions

The U.S. Supreme Court historically has restricted the standing of plaintiffs suing the federal government to invoke Article III “case or controversy” jurisdiction merely based on their status as taxpayers.

In DaimlerChrysler Corp. v. Cuno, No. 04-1704 (May 15, 2006), the Court extended that jurisprudence to cases involving state taxpayers suing state governments to challenge state tax or spending decisions.

Moreover, while the Court has permitted municipal residents to sue municipalities to challenge the illegal use of public funds by the municipal corporation, the Court held that such precedents did not confer standing on municipal residents to challenge state tax or spending decisions.

U.S. Supreme Court Curtails Probate Exception To Federal Jurisdiction

As reported in January 2005, the Ninth Circuit held in In re Marshall, 392 F.3d 1118 (9th Cir. Dec. 30, 2004), that the probate exception to federal jurisdiction applied in Bankruptcy Court. However, the Supreme Court has now reversed that decision as extending the probate exception too broadly.

The Ninth Circuit read the probate exception to exclude from federal jurisdiction “not only direct challenges to a will or trust, but also questions which would ordinarily be decided by a probate court in determining the validity of the decedent’s estate planning instrument.” The court also held that a State’s vesting of exclusive jurisdiction over probate matters in a special court (in this case the Texas Probate Court) strips federal courts of jurisdiction to entertain any “probate related matter,” including claims respecting “tax liability, debt, gift, [or] tort.”

However, the Supreme Court found that this broad reading lacked any basis in statute or Supreme Court precedent. Marshall v. Marshall, No. 04-1544 (U.S. May 1, 2006).

Clarifying its juris­prudence in this area, the Court said the probate exception only reserves to state probate courts the probate or annulment of a will and the administration of a decedent’s estate, and precludes federal courts from disposing of property that is in the custody of a state probate court. The probate exception does not bar federal courts from adjudicating matters outside those confines that otherwise are within federal jurisdiction.

Tobacco Company Punitive Damages Exceeding Single-Digit Ratio Upheld

The California intermediate appellate court has upheld a significant punitive damages award against Philip Morris.

In Bullock v. Philip Morris USA, Inc., No. B164398 (Cal. App. (2d Dist.) Apr. 21, 2006), the jury awarded a smoker $850,000 in compensatory damages and $28 billion in punitive damages based on findings of defective design, intentional and negligent misrepresentation and fraudulent concealment about the health effects of smoking, and findings that Philip Morris was guilty of malice, fraud, or oppression with respect to each of plaintiffs’ claims. The trial court reduced the punitive award to $28 million (about 33 times compensatory damages) on remittitur.

The appellate court found that a sufficient record was presented to the jury of extensive efforts by Philip Morris to mislead the public about the adverse effects of smoking, and that it was not necessary to prove that defendant made any specific misrepresentation directly to the plaintiff when it had every reason to expect its misrepresentations to find plaintiff indirectly.

The court acknowledged that the California Supreme Court in Simon v. San Paolo U.S. Holding Co., Inc., 35 Cal.4th 1159 (2005), read State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408 (2003), as establishing a presumption that a ratio of punitive to compensatory damages greater than a single digit violates due process, but left open that in cases of “extreme reprehensibility” a greater award might be appropriate. Here, the court found this standard satisfied based on the record, and upheld the award.